[National Hydroelectric Power Corporation Ltd. v. CIT, (2010)
320 ITR 374 (SC)]
The assessee was required to sell electricity to State
Electricity Board(s), Discoms, etc., at tariff rates notified by the CERC. The
tariff consists of depreciation, Advance Against Depreciation (AAD), interest on
loans, interest on working capital, operation and maintenance expenses, return
on equity.
On May 26, 1997, the Govt. of India introduced a mechanism to
generate additional cash flow, by allowing companies to collect AAD by way of
tariff charge. The year in which normal depreciation fell short of the original
scheduled loan repayment instalment (capped at 1/12th of the original loan) such
shortfall would be collected as advance against future depreciation.
According to the Authority for Advance Rulings (AAR), the
assessee supplied electricity at tariff rate notified by the CERC and recovered
the sale price, which became its income; that, in future the said sale price was
neither refundable nor adjustable against future bills.
However, according to the Authority of Advance Ruling (AAR),
when it came to computation of book profit, the assessee deducted the AAD
component from the total sale price and only the balance amount net of the AAD
was taken into the profit and loss account and book profit. Consequently, the
AAR ruled that reduction of the AAD from the ‘sales’ was nothing but a reserve
which had to be added back on the basis of clause (b) of Explanation 1 to S.
115JB of the Income-tax Act, 1961.
The Supreme Court held that on reading Explanation 1, it was
clear that to make an addition under clause (b) two conditions must be jointly
satisfied :
(a) There must be a debit of the amount to the profit and
loss account.
(b) The amount so debited must be carried to the reserve.
Since the amount of AAD was reduced from sales, there was no
debit in the profit and loss account, the amount did not enter the stream of
income for the purposes of determination of net profit at all, hence clause (b)
of Explanation 1 was not applicable. It was not an appropriation of profits. AAD
was not meant for an uncertain purpose. AAD was an amount that is under
obligation, right from the inception, to get adjusted in the future hence, could
not be designated as a reserve. AAD was nothing but an adjustment by reducing
the normal depreciation includible in the future years in such a manner that at
the end of the useful life of the plant (which is normally 30 years), the same
would be reduced to nil.
According to the Supreme Court the AAD was a timing
difference, it was not a reserve, it was not carried through the profit and loss
account and that it was ‘income received in advance’ subject to adjustment in
future and, therefore, clause (b) of Explanation 1 to S. 115JB was not
applicable.
